In what ways would an inventory reduction help the company?An inventory reduction will be beneficial to the organization since there will be areduction in costs. A reduction in inventory translates to lower carriage costs, lowertransportation costs, and lower warehouse costs. It also helps in the elimination of obsolete stock.The working capital needs will be reduced […]
To start, you canIn what ways would an inventory reduction help the company?
An inventory reduction will be beneficial to the organization since there will be a
reduction in costs. A reduction in inventory translates to lower carriage costs, lower
transportation costs, and lower warehouse costs. It also helps in the elimination of obsolete stock.
The working capital needs will be reduced together with the checklist at hand. It will be possible to
generate more profits since the cost per unit has increased from $60 to $110. The amount of sales
will rise, and it will be possible to generate more profits from selling the reduced amount of
inventory. The expenses will reduce if there is a reduction in the inventory, and the focus will be
more on increasing the marginal gains.
In what ways would the change from LIFO to FIFO help the executive personally?
While there is a price increase, a change in the LIFO and FIFO will result in a raise in
time and the overall net income for a given period. One of the main advantages of FIFO is that it
eliminates the problem of fluctuating costs of inventory. However, using FIFO can result in the
company appearing to be having more cash flow than it has. It may make a company appear to
be making higher profits than it is. In contrast, LIFO helps an organization gain a tax
advantage. Lower profits are reported and hence lower tax obligations. However, it is difficult to
use LIFO compared to FIFO because of the complexity of the accounting methods. Certain
accounting standards do not approve the use of LIFO.
Switching from LIFO to FIFO will help the executive evaluate the level of performance.
That is because FIFO uses the latest lot that has been purchased in the valuation of the inventory
and the before lower prices that are present in the purchased lot for the goods that have been
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sold. When the net income is high, the executive receives the needed assistance since there will
be annual bonuses equivalent to 5% of the net income.
Would you approve the proposal to move from LIFO to FIFO? Why or why not?
Yes, I would approve the move from LIFO to FIFO. That is because there are changes
taking place in the accounting when the inventory is reduced, and they need to be accounted for
both in the short- and long- run. The accounting method used in the valuation is a section of the
accounting policy within a company. There is a need to have consistency in the application from
one given period to another. Therefore, the suggestion to shift from LIFO to FIFO can undergo
approval at one time. The changes cannot be made every year.
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